Equity Markets Stabilize

Posted on September 19, 2016

Weekly Update

9/19/2016

Market State 6: (6 days). Market State 6 is a Transitional market environment. The spike in volatility on Friday, September 9th temporarily shifted the Portfolio Thermostat’s Market State to Transitional, from Bullish. Market State 6 does not call for a change in allocation, but will allow for a higher percentage in ETFs that are alternatives to global stocks.

Canterbury Volatility Index (CVI 58): Volatility below CVI 75 is considered to be in the “safe zone” (meaning that a short term decline should not exceed a normal bull market correction of about -10% from the previous peak in value). The exception occurs when a one day change in the CVI exceeds 7 points. The CVI increased 10 points on 9/9/16, to a Transitional Market State.

A “Volatility Alert” was issued and published in our 8/30/16 Weekly Update calling for a potential “one day outlier” (one day move of 1.5% or more).

8/30/16: “The shortened CVI is used specifically for identifying periods that are most likely to experience potential single day outliers that could exceed 1.5% plus, either up or down. The Short Term CVI is below its optimum range of CVI 35 (now CVI 29). Even though some short term market turbulence is expected soon, our current bullish market stance remains intact.”

The S&P 500 had a one day outlier of -2.5% just seven trading days later. How did Canterbury’s algorithms identify the likelihood of such a rare one day move in the middle of a sluggish bullish period?

Weekly Update 8/23/16:Volatility Can Move From One Extreme to AnotherCanterbury’s studies show that volatility is likely to experience certain times of extremes, with periods of very high volatility often followed by periods of very low volatility and vice versa. The current CVI of 54 is only one point off of the volatility reading (of 53) that was registered approximately this time last year. Last year, the low volatility reading was followed by a sharp decline a few weeks later.

What is most likely to occur following a “one day outlier” resulting from a previous period of extreme low volatility?Last week’s update published 9/12/16:Most outliers are followed by normal market fluctuations, in other words, the markets would return to stability and behave as if nothing had happened. In a few cases, an outlier is followed by a few days of higher volatility prior to a return to a normal market environment. It may just take a few days for the markets to shake off the effects of last Friday.

The following is a summary of last week’s daily fluctuations:

S&P 500Monday: +1.44% (retraced two thirds of Friday's decline)Tuesday:-1.35% “It may just take a few days for the markets to shake off the effects of last Friday.”Wednesday:0.00%Thursday:-0.99%Friday:-0.04% “Most outliers are followed by normal market fluctuations, in other words, the markets would return to stability and behave as if nothing had happened.”

Bottom Line:
The last few Weekly Updates have described what the Canterbury Portfolio Thermostat’s algorithms are telling us.
What is most likely scenario from here?
Weekly Update published 8/30/16: Even though some short term market turbulence is expected soon, our current bullish market stance remains intact.” In other words, the expected outlier occurred, the markets have shaken-off the effects and the temporary Market State 6 caution is expected to shift back to a confirmed bullish Market State soon.

Side Note:
The S&P 500’s 2.5% move on 9/9/16 ended one of the longest streaks of consecutive daily moves of less than 1% (59 consecutive days). On average, the stock market will see a 1% change (up or down) about every 4 trading days.*

*Source: Bloomberg

Source: Canterbury Market States Chart

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.